Year 2017 is the fourth year the Finance Minister (FM) will be presenting his budget under the Modi-led Government. The Budget will come in the wake of several bold steps taken by the Government in the recent past like demonetisation, implementation of GST, income disclosure schemes, measures announced by the PM on 31 December 2016, etc, with the positive intent to curb black money and to bring changes in the Indian economy towards growth and development. Reports indicate that the last quarter has suffered deceleration in demand and consumption with the RBI estimating a reduction in GDP growth from 7.6 percent in early 2016 to 7.1 percent in 2017.
Given the environment, the coming Budget carries the weight of many expectations, including some in relation to the tax provisions and related policy announcements.
To counter the fears of declining growth, domestic tax payers would have an expectation of rate reduction from Budget 2017.Coupled with the same,amendments should also be made to rationalise the Minimum Alternative Tax (MAT) rate and perhaps, evaluate a phased out elimination of the MAT levy altogether.
But beyond this, there is an expectation of the Government to undertake measures to prop up sentiment and ensure continued foreign investment in the country. Some areas where announcements/ amendments in the Budget 2017 would be welcome are enumerated below:
Address investor uncertainty post GAAR and tax treaty re-negotiations
1 April 2017 is an important milestone date with both the General Anti Avoidance Rules (GAAR) and revised provisions of tax treaties such as Mauritius, Singapore, Cyprus, etcto remove the source based capital gains tax exemption on transfer of sharescoming into force.
While the Government has grandfathered all past investments from these prospective amendments, providing much needed guidance and certainty to investors in the form of clarifications on the manner of application of GAAR and some relief on the capital gain tax regime under the domestic tax law would be welcome.
Clear the cloud of fear surrounding the application of indirect transfer provisions, especially to FPI and PE investments into India
Indirect transfer tax provisions were introduced into the Indian tax law following the landmark judgement of the Supreme Court of India in the case of Vodafone. This had led to a general perception and understanding that these provisions were introduced to tax transfer of share/ interest in offshore holding companies resulting in transfer of controlling stake in an Indian company and that the intent was not to apply these provisions in case of portfolio investment structures and private equity venture capital funds where exits from Indian securities already suffer taxation.
However, Circular No. 41 recently issued by the CBDT in an FAQ format, discussed various investment scenarios in the context of the indirect transfer provisions and applied the present provisions of the law strictly to the said structures. This could result in double or multiple level of taxation of the same income as the gain on transfer direct investments is in any case being offered to tax in such cases.
Based on the representations made by various stakeholders, CBDT issued a press release on 17 January, 2017 under which the Circular No. 41 is currently kept in abeyance. While this step is much appreciated, it would be a welcome move by the Government, to provide suitable carve-outs from the application of the indirect transfer provisions to this structures, so as to avoid any deterrents from future investments into Indian industry and the Indian capital markets.
Rationalise the tax regime for debt investments in India
Presently, the tax laws provide for differing tax rates (40 percent/30 percent/20 percent/5 percent) on interest income arising on different types of debt investments (such as rupee borrowings, foreign currency borrowings, specified borrowings) by a non-resident.
In the recent past, we have seen the Government introducing various regulatory reforms (FPI investment in unlisted debt, issuance of Rupee Denominated bonds (RDBs), amendment of legislation to enable foreign investments into Indian stressed assets, etc). This shows the Government’s intention to nurture debt investment in areas that need capital funding. Therefore, a clear and uniform tax regime encouraging foreign investment in such sectors and resolving any residual controversies around taxability of such instruments would be well received. In any event, the Government should strongly consider extending the present concessional rate of 5 percent (expiring in 2017) afforded to specified debt investments for a further 3-5 years.
Certain other welcome measures would include:
Several steps have been taken to encourage both investment into India as well as provide an impetus to the Indian asset management industry in last few years including the introduction of specific beneficial tax regimes to facilitate location of a fund manager of offshore funds to India, incentive tax regimes for business trusts (ReITs/InvITs), securitisation trusts, AIFs, etc. However, there are still certain residual concerns raised by the industry which hinder the full-fledged embracing of these investment avenues. The Government should make requisite changes such that the objectives on both the sides are met.
Deferral of the test of ‘Place of Effective Management’ to determine the residential status of a foreign company by at least a year as the final guidelines has just been released.
Extension of the safe harbor rules and a revision of margins to encourage the companies to choose this route and release the pressure on the APA programme.
The wish list of the common man, industry and investors is long and, as always, the FM has a difficult task before him in striking a balance between the expectations of the tax payers and achieving its fiscal targets and policy ambitions.
(The author is Tax Partner, EY India)
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Updated Date: Jan 31, 2017 12:08:32 IST